Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Actions Semiconductor Company Ltd. (NASDAQ:ACTS)

Q4 2010 Earnings Conference Call

January 27, 2011 5:30 PM ET

Executives

Grace Reyes – IR, The Blueshirt Group

Patricia Chou – CFO

Niccolo Chen – CEO

Analysts

Rick Fearon – Accretive Capital Partners

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Actions Semiconductor Fourth Quarter and Fiscal Year 2010 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded, Thursday, January 27 of 2011.

I would pass over to Grace Reyes. Please go ahead, ma’am.

Grace Reyes

Good afternoon and thank you for joining us on today’s conference call to discuss Actions Semiconductor’s fourth quarter and fiscal year 2010 financial results. This call is being broadcast live over the web and can be accessed on the Investor Relations section of Actions’ website, www.actions-semi.com for 90 days. On today’s call are Niccolo Chen, Chief Executive Officer; and Patricia Chou, Chief Financial Officer.

After the market closed in the U.S. today, Actions issued a press release discussing the results for its fourth quarter and fiscal year ended December 31st, 2010. The press release was also filed on Form 6-K with the U.S. Securities and Exchange Commission. The press release is accessible online at the company’s website, as well as the SEC’s website or you can call The Blueshirt Group at 415-217-7722 and we will fax or e-mail you a copy.

We would like to remind you that during the course of this conference call, Actions’ management team may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are simply estimates and actual events or results may differ materially.

We refer you to the documents that Actions files from time to time with the SEC, specifically the company’s most recently filed Forms F-1, 20-F and 6-Ks. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

And now, I would like to turn over the call to Patricia Chou.

Patricia Chou

Thank you for participating in Actions’ earnings conference call. We appreciate your continued interest and support for Action. I will provide a business update and discuss financial results for the fourth quarter, and the fiscal year 2010, as well as expectations for future performance.

Niccolo will be available during the Q&A portion of the call where I will translate from Mandarin to English on his behalf. First I will discuss our financial results for the fourth quarter. As a reminder, our financials are reported in accordance with U.S. GAAP.

For the fourth quarter ended December 31st 2010, we recorded revenue of $10.7 million, compared to $9.3 million in the third quarter. Revenue for the year 2010 was $37.6 million, compared to revenue of $44.1 million for the year 2009.

Our gross margin for the fourth quarter was 37.1%, compared to 40.1% for the third quarter. The decline in gross margin following three quarters of sequential increases was primarily due to an inventory write-off of $0.2 million.

For the fourth quarter, total stock-based compensation expense was a credit over $0.2 million than as the third quarter which included a true-up of underestimated forfeiture rate.

R&D expense was $4.4 million or 41.2% of revenue for the fourth quarter, compared to $3.9 million in the third quarter. We anticipate our R&D expense to continue to represent a high percentage of revenue, as we need more R&D talent to focus on our diversified product development initiative.

G&A expense was $2.2 million in the fourth quarter or 20.5% of revenue, which was slightly higher than the third quarter of $1.8 million. Sales and the marketing expense was $0.4 million in the fourth quarter or 3.9% of revenue, compared to $0.2 million in the third quarter. We continue to tightly manage the expense levels in this category as demonstrated by our hiring freeze of across non-engineering functions and the salary cuts at the management level.

Operating loss was $3 million for the fourth quarter, compared to operating loss of $1.8 million for the third quarter. As a result of the continued appreciation of Chinese Yuan against the U.S dollar, and payroll level increase in China sell in market, we expect our operating expense denominated in Chinese Yuan to increase gradually.

Net other income was $0.8 million as a net result of foreign exchange gain. Other income of $1.1 million for the third quarter was also related to a net foreign exchange gain. Increased income was $2.5 million for the fourth quarter, up directly from fourth – $2.4 million in the third quarter.

Income before taxes was $0.3 million for the fourth quarter, as compared to income of $1.7 million in the third quarter. Net income tax expense was $0.1 million for the fourth quarter, compared to income tax expense of $0.4 million in the third quarter. Net loss attributable to Action Semiconductor under the U.S. GAAP basis for the fourth quarter was $0.15 million or $0.2 per diluted ADS, compared to net income of $1.9 million or $0.03 per diluted ADS for the third quarter.

Net income for the full-year 2010 was $0.4 million, compared to a net loss of $10.4 million reported for 2009. Net income per ADS was $0.01 for the year 2010, compared to a net loss per ADS of $0.14 reported for the year 2009.

Moving to the balance sheet. Cash and cash equivalent together with current deposits, trading securities and both current and non-current marketable securities totaled $232.6 million as of December 31, 2010, compared to $237.3 million at the end of the third quarter. The sequential decrease in our cash balance as of December 31 was due to $2 million used for the share buyback program, $0.6 million injected to an equity method investee and $2.3 million invested in the construction of our headquarters building in Zhuhai.

Of the $232.6 million total, $42.9 million was in cash, time deposits, and short-term interest-bearing investments that were generally issued by large domestic banks in China for terms no more than three months and can be redeemed at any time.

$189.7 million was in trading securities and marketable securities, both current and non-current, which were principal guarantees or pledged investments with higher interest rates and minimum terms of three months. These marketable securities were mainly issued, managed or guaranteed by top ranking state-owned financial institutions in China.

Accounts receivable was $2.5 million at the end of the fourth quarter, down from $3.1 million at the end of the third quarter.

Inventories were $4.8 million at the end of the fourth quarter, down from $6.1 million at the end of the prior quarter. Compared with prior quarter, our relatively lower inventory balance in the fourth quarter was directly correlated with higher shipments in automotive, high-definition and gaming products in the fourth quarter and lower shipments expected in the first quarter 2011 for historical seasonality.

We continue to buy back shares, spending approximately $2 million on the share repurchase program during the fourth quarter, compared with $2.1 million in the third quarter. Our repurchase activity remains constrained by trading volume and blackout periods for our 10B-18 program, as well as limited activity in block trading.

Although the current buyback under 10B-18 program looks passive, it has proven cost savings and provides lower risk to long-term shareholders and the company than alternative options, particularly at the current stock trading price.

At the end of December 31, 2010, the company had invested approximately a total of $35.2 million in the program, representing approximately 14.9 million ADS shares.

I would now like to discuss our progress in each of our product categories during the quarter. Volume shipments and sales of the automotive and boom box products, targeting the low end market segment increased sequentially, primarily because the emerging market including China recovered from the financial crisis gradually, and increased the demand for our value oriented products for (inaudible) in the fourth quarter.

Additionally, components such as FM transmitters for automotive audio product became more widely available following a shortage in the third quarter. We have created leading spec with excellent stability and cost structure in the mainstream to high end boom box market, and most of the brand name boom box customers in China have responded well to our products.

This product represented more than 35% of our total shipments during the fourth quarter. In the fourth quarter, sales to the mainstream segment of the PMP market serving no display, mono display and a small color display media product decreased in volume, and as a percentage of our total revenue. Even though the mentioned market size has been cannibalized by the high and low end product, we still maintain the leading position in market share of this category.

The MP4 market continues to be a key segment for action. Shipments of our products serving the QVGA MP4, D1 PMP, and high definition PMP statements represented around 35% of our total sales amount in the fourth quarter.

Our shipments in the MP4 segment have not grown as fast as anticipated, mainly due to the financial weakness in our major consumer and market, including the U.S. and Europe. Also because our MP4 products focus on expert sales to the development market, the slower fourth quarter represented the typical seasonality for U.S. and Europe, where sales peaks usually in the third quarter.

We think our MP4 market segment, sales of few VGA MP4 with CMOS image sensor continue to represent largest portion of MP4 sales and captured the leading market share in the quarter.

In the D1 segment, our Series 25 high-quality product design and comprehensive customer support are continuing to help us gain share. Our Series 27 chips for high definition 722p products, a success for the comments that’s unfolding in the third quarter and have received a very positive customer response in the fourth quarter. While this is behind our original schedule and caused a significant sales fluctuation in 2010, we expect to begin to see a meaningful revenue contribution from this new product line in first half of 2011.

Increased sales in this category should enable us to favorably shift our product mix to the higher margin and a faster growing segment of the market, thereby partially offsetting ever-present ASP erosion in the overall PMP market.

During the fourth quarter, 0.15 micron process technology was used for the majority of our shipment volume and current inventory. We have successfully migrated our volume products from 0.16 micron to 0.15 micron technology. As planned, we also ramped up our 0.11 micron mass production in the fourth quarter. We have been pleased to see stabilized wafer prices and relaxed foundry capacity by using 0.15 and 0.16 micron process technology, which has helped us to managing our cost structure pattern.

Furthermore, we plan to shrink our advanced products to 55 nanometer production technology in the second half of 2011.

In summary, I would like to quickly highlight a few accomplishments for the year. First of all, we introduced three product families targeted towards the mobile video entertainment market and successfully penetrated the high-end PMP market. These new product lines target faster growing segments of the MP4 market and have received positive responses.

Our Series 23 for QVGA and Series 25 for D1 MP4 has gained a fair market share in 2010. Our Series 27 for high definition 720p MP4 has obtained approximately 15 design wins and had more than 30 modules in China now after its launch in late Q3, 2010.

Secondly, we expedited our product development process (inaudible) acquisition. We acquired R&D team focused on Android-based MID in the third quarter, and expect to assemble this new product in the first half of 2011.

Third, we continue to benefit from our diversified product offerings as volumes of our lower-end products such as automotive, and boom box controlled ICs remained high. Fourth, we closely managed the expenses in all areas outside of R&D, and continued our cost reduction activities. By maintaining a low cost structure, we derived our strong balance sheet and cash position.

On a full-year basis, we breakeven for 2010 versus a loss for 2009. Our related product reduction such as our new gaming product line, series G1000 are directed out of the investment we have been making

to R&D.

Heading into 2011, our new series 28 of high definition 1080P by advanced MP4 just launched for – pulling and expect to move into mass production in Q2 2011.

We have increasing momentum in number of the markets that we served, such as video gaming, digital video recording, Android-based MID to be bought, high definition 1080P and 720P MP4, automotive RBO and boom box audio player. Factoring in typical seasonality and the supply chain around Chinese New Year, our guidance for the first quarter 2011 as revenue in the range of 7.5 to $8.5 million.

Gross margin approximately 40% and operating expenses trending, slightly higher on a sequential basis. The first quarter 2011 estimate include the share-based compensation expense of approximately $0.6 million.

For the full-year 2011, based on current business trends and the lead increasing revenue contribution from our advanced product for such as gaming and high definition PMP, we expect revenue to drill 15% or more. Given the timing of the revenue rent for the new product, as well as new seasonality we expect growth will be awaited to second half of the year.

In order to keep rolling out new products especially on the Android platform in each market. We will continue to expedite our R&D results via organic growth and external collaboration along the value chain.

In addition to the emphasis on R&D, we’ll also strengthen our marketing efforts to promote diversified products with band name channels. We will update investors quarterly on our progress in 2011. And now, we would like to open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) And our first question comes from the line of Rick Fearon with Accretive Capital Partners. Please go ahead.

Rick Fearon – Accretive Capital Partners

Hi, Niccolo and Patricia.

Patricia Chou

Good morning. Oh, I’m sorry, good afternoon for you, good morning for us.

Rick Fearon – Accretive Capital Partners

A snowy good evening actually.

Patricia Chou

Oh.

Rick Fearon – Accretive Capital Partners

Yes, it’s been a tough winter here in Connecticut. I know you had a $200,000 inventory write-off in the fourth quarter, but did anything else contribute to the drop in gross margin? And it sounds like you’re expecting the gross margin to be back up at the 40% level in the first quarter of 2011. Is that because ASPs are stabilizing or is that a combination of ASPs as well as product mix?

Patricia Chou

In fact, if we did not have considered the inventory write-off of $0.2 million in fourth quarter, the fourth quarter’s gross margin should also be around 40%. So that’s why we think the first quarter’s, this year’s gross margin should resume to the normal range of approximately 40%. Of course, we indeed experienced a stabilized ASP after we upgrading our product mix to the higher end products in MP4, which enjoys a better, APS and a better gross margin.

Rick Fearon – Accretive Capital Partners

Okay. And APSs with the various categories, are you seeing the continued evolution at the MP3 level, the traditional product line or has that more or less stabilized?

Patricia Chou

The ASPs for MP3 and low-end products are getting stabilized more and more because to a certain point, our competitors cannot really fail without any margin, so we expect the price will go behind to a certain level that all of us can really lift with or get out of the market.

Rick Fearon – Accretive Capital Partners

And as some of those competitors presumably have exited the market, have you ticked up market share or you mentioned that you still believe you lead with market share, is that still kind of the 40% market share that you think you have?

Patricia Chou

Right now, the MP3 and low-end markets have many niche segments within one big category. So in certain niche markets, we still enjoy relatively high market share such as the 40% you just mentioned.

Rick Fearon – Accretive Capital Partners

Okay. And the MP4 product now, I’m not sure if I understood correctly. But, did you say you believe that you have leading market share there as well?

Patricia Chou

Same thing or similarly was MP3 market. In MP4, there are many niche or diversified segments too. So the leading market share for us in MP4 is in the QVGA segment with the CEMOP image center application. Within that diversified application, we do enjoying a very high market share and the market leader status.

Rick Fearon – Accretive Capital Partners

Okay, great. And it sounds like, you’re starting to see some results from the 17 to $19 million of annual R&D that you know, the company has been spending for the past three years. Can you just provide a little more insight in to how much annual revenue you might expect from some of these new products such as the G1000 or the android line. Do you have a sense of what those might be able to throw off on an annual basis?

Patricia Chou

Just like I mentioned in the previous discussion, we expect the revenue to grow 15% or more and in the whole year 2011, we expect around 50% of our revenue will come from the MP4 category.

Rick Fearon – Accretive Capital Partners

Okay. So if you’re kind of running around 30, little over $30 million annual revenue rate now, maybe you will be up around 35 million in 2011, is that more or less what you’re saying?

Patricia Chou

For 2010 our total revenue is around $38 million, and we expect our revenue will go over $40 million, of course, I’m not saying is just exactly 40, it should be more than $40 million. And one thing revenue I think we have penetrated into the MP4 market. We expect bigger portion of our sales come from the higher end, which would contribute higher ASP and higher margin.

Rick Fearon – Accretive Capital Partners

Okay. I was looking at your third party revenues when I quoted the 30 million. So the related party sales will grow kind of lock (ph) step with the third party revenues, and you would think that overall revenues will be up about 15%. And just to clarify half of those will come from these two new products, you believe?

Patricia Chou

Another one in these new products. The new products are portion of our new products for 2011. In MP4 categories, we would have more products in 2011. Right now, we have four segment within this MP4 category. Such as 2VGA, D1, High Definition 720P and High Definition 1080P. And we are moving up along the line up to the 1080P segment now. So we expect more new product alone in 2011. And in total of the revenue contribution from all these new product, we expect to have around 50% of our revenue in 2011 come from the overall MP4 category.

Rick Fearon – Accretive Capital Partners

Okay. And that’s really the meaningful contribution from the new those products is really back-end loaded it sounds like.

Patricia Chou

Yes, that’s because for the PMP markets, it is more toward to the second half. And most of our new products need it as I said 6 months to ramp up to the mass production stage. So for example, our Series 27 and 28 products in the year, high-definition categories. We expect them to make a meaningful contribution in revenue starting this second quarter or third quarter this year.

Rick Fearon – Accretive Capital Partners

Okay. And in the G1000 is that – what percentage of that would you expect the G1000 to be, when you have 50% of your sales, I mean, the G1000 is still getting off the ground, is that fair to say?

Patricia Chou

G1000 is already in the market, so we expect this product will make more sales in the second half and – yeah, second half of this year. Because for PMP, this analogy is usually quite clear and they’ll have a starting with the back-to-school sales in the developed markets. So easily we’re enjoying jump in sales starting in third quarter.

Rick Fearon – Accretive Capital Partners

Okay. It just seems that the G1000 is targeting an end market that is huge. I mean, the Android product, the G1000, those would seem that if you’re able to win some real significant market share the way historically the company has enjoyed leading market share with its legacy product that it could grow to be a very, very significant. Is that the right way to think about it?

Patricia Chou

This product enjoys much higher ASPs than our conventional product. So they’re definitely accounted for a much bigger portion of our sales amount certainly.

Rick Fearon – Accretive Capital Partners

Okay. Well, is there something to be – if you look at really reinventing the company and introducing these new product lines, which will provide the growth into the future. Is there anything to be learned from management’s playbook back kind of in the 2004 to 2006 timeframe when revenues ramped up from 57 million to 170 million. It is maybe a question for Niccolo, but just wondering if there is something from, something about the way things were done so successfully at Actions Semiconductor that you might be able to apply today.

Patricia Chou

That’s a very good question. Let me translate your question and advice to Niccolo, and just a moment please.

Patricia Chou

(Foreign Language)

Niccolo Chen

(Foreign Language)

Patricia Chou

Let me translate Niccolo’s comments in English. First of all, we need right products in the right timing for rapid growth, and back to 2004 to 2006 for MP3. At that time, we did not have so severe competition at that time. And now the market is totally different from the six years ago. So right now it is – it will be much more challenging for us to take over the market leadership so fast with our few new products like six years ago. But we with our consistent R&D investments in the past two, three years, we expect to demonstrate some significant growth in year 2012.

Rick Fearon – Accretive Capital Partners

Okay. And has anything changed since the 2005, 2006 timeframe in terms of the type of customer, in your customer base, was it a similar sort of large distributor composition in your customer base or were there some OEMs?

Patricia Chou

Our business model has been very consistent. However, the market is quite different now from say 2005 to 2006. So we will, we are still enjoying the good relationship along the supply chain that we have accumulated since six years ago. However, the players in the market now are quite different from the good old time.

Rick Fearon – Accretive Capital Partners

Okay. That’s helpful. Thank you. I have one more comment and then I will step up. I know you and Niccolo brought the idea of Dutch tender offer to your board again prior to last quarter’s conference call, I just would like to again employ you to bring this idea back to the Board of Directors especially before you stock price begins to respond to the expected improvement in operations. And I think it will be a very well received idea that shareholders would embrace and it will be good for all shareholders and the company. I will step up now let others ask questions and just I want to wish you good look for 2011.

Patricia Chou

Thank you so much Rick, and we’ll keep you the (inaudible). Thank you.

Rick Fearon – Accretive Capital Partners

Thank you.

Operator

Thank you. And I’m showing no further audio questions at this time. I will turn the call back to management for any closing remarks.

Grace Reyes

Thanks again for joining us on today’s earnings call. We appreciate your interest and continued support of Action. We look forward to providing updates on our business during next quarters call. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. If you would like to listen to a replay of this conference, please dial 1-800-406-7325 or 303-590-3030, and entering the access 439-9701. We think you for your participation and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Actions Semiconductor CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts